February 2009

Total Ignorance about Financial Matters

Americans are really ignorant - to the point of downright stupidity when it comes to mathematical matters.  My wife has joined Weight Watchers, and here is an example of the kind of stuff that appears on the board on a regular basis:  I bought a pizza that is said to serve 6.  I know the nutritional value per serving, but I only ate 1/8 of the pizza.  How on earth can I figure out the nutritional value of what I ate?  That math stuff is really hard.

Now that was a 5th grade math problem, with the insignificant difference that when I was in the 5th grade they had not yet invented pizza, or at least brought it to Houston, TX.  Oh yes, they had not yet invented 5-digit zip codes or 2-letter codes for the states.

We need financial education in this country, but it should start with simple math.  Also, it should include understanding and monitoring one's investments.  There were people who never knew that they had money with Madoff.  The lawsuits for this will go on for years, and will rightly sully the reputations of a lot of financial advisors.

The stimulus bill is floundering on.  Senators and Representatives have demonstrated once again that they can talk for long periods of time and say nothing.  I wonder if watching the Senate is what inspired Seinfeld to create a show about nothing.

Another thing about the Weight Watchers Board is that many of its members do not seem to have the slightest idea of how to cook.  "I bought some zuccini.  What do I do?"  "What does it mean when it says sautee?"  Are Americans as ignorant of cooking as they are of financial matters?

Evidence of the Decadent West

Creations above from various fashion shows.  Clearly we have not gone far enough into a Recession, or this sort of nonsense would simply not be done.  Fashion, in general, is really stupid.  Only the materialistic and stupid people, like Gabrielle Solis, think that this sort of thing is important.  And if you do not know who she is, Desperate Housewives is showing re-runs on Lifetime weekdays from 12 - 2:00.  Maybe we really need a Recession so that people will understand what is really important.  There are just too many things that get sold that either have no real purpose (stuff to give you thick eyelashes comes to mind), or things whose only recommendation is that it is a name brand - like Dove bath liquid soap as opposed to a generic at 40% less.  We waste a huge amount of money in this country.

February 18, 2009

Stanford International Bank appears to be guilty of fraud for as long as 15 years.  So are this bank's certificates of deposit insured?  Not exactly:  Stanford International Bank, domiciled in Antigua, is a member of Stanford Private Wealth Management, a global financial services network with $51 billion in deposits and assets under management or advisement. Backed by a 75-year family tradition of exceptional client service, Stanford Private Wealth Management serves more than 70,000 clients in 140 countries.  That is from their website.  It turns out that Sir Allen Stanford was knighted, but I do not see what good deed he did for that.  Can you revoke that status for bad behavior?

Now it turns out that Stanford has gone into hiding.  Nobody knows where he is.  However, CNBC television said he tried to hire a private jet to fly from Houston, the site of his U.S. headquarters, to Antigua, but the jet lessor refused to accept his credit card.  That's cool.  In better times, he gave a bundle to people in Congress and to lobbyists.  In particular, Stanford Financial or its employees also contributed to the legal defense funds of three lawmakers tarnished by ethics allegations -- DeLay, Democratic Senator Robert Torricelli, Republican Bob Ney.

Birds of a feather...  

February 20, 2009

Just a Start

Now here is something.  Just as an exercise, I am putting together a buy and hold portfolio.  Not actually buying it, but it will be interesting to see if buying good stocks and diversifying somewhat will work out in this market.  There is no attempt at complete diversification.  Some of these stocks appear to have bottomed, and others are recovering.  The only truly speculative buy is BAC. Below are my picks, which include 4 ETFs. Suitability for intended use is not guaranteed - maybe not even expected.  Today is supposed to be a good day to buy, because the pundits say that the market has bottomed (again).  I wonder if that is true.  During the period 2003 - 2007 this portfolio, if the stocks were equally weighted, and assuming dividend reinvestment (admittedly not always possible) is up at an annualized rate of about 41%, providing you delete the stocks and ETFs that were not around in 2003.  Those are MOO, GLD, SLV, FSLR, and BUCY.  The results are better if you add those in.  During that period the worst draw-down is about 12%.  From 2007 to the present it is down over 40%.  I find the past performance of this portfolio quite remarkable - I picked the stocks without observing that performance, which was calculated later.  I used mostly round lots because if I actually ever buy into this portfolio, I will probably want to protect it with options.

Here is a good quote:  When a trader is asked what he thinks the market will do and answers, ‘I hope it goes up,’ odds are he is long and the market is going down. Hope should never be a trading evaluation. It is normally an indication of not admitting a bad position or having unrealistically optimistic expectations about a trend continuing forever. Once hope sets in, traders need to reevaluate their position quickly because hoping just doesn’t work. - Marcel Link

In other words, ignore reality because it is too hard, and instead look at other people's perception of reality (the credit default swaps). That makes things so much more simple. It is also totally idiotic.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.

Note that: There is a quote I got from Google Quote of the Day (but cannot find now) to the effect that the world is made up of people who understand what they do not manage and other people who manage what they do not understand.

The article is long and very worthwhile. Back when I worked at MITRE I used to say that what we did was just applied common sense, and that was true when we were successful.
There was no common sense in the development of this mathematical model, and this should never again be allowed.

Somebody at the Motley Fool - one of the people who really knows his stuff - has also commented on the article.  He goes into the fallacious reasoning in greater detail.  He lists four classic mistakes:  1) Inadequate historical data, 2) The improbable is not the same as the impossible, 3) The activities engaged in by market participants changed the underlying markets themselves (which Heraclitus knew when he pointed out that you cannot step into the same river twice - the river changes and you change and you change the river), and 4) Costs and benefits removed in place and time.

February 25, 2009

Anybody go to Mardi Gras?

February 28, 2009

Well, here is the model portfolio.  All of these companies are good companies, yet in just a week, the portfolio has lost 5.51%.  GS has shown itself to be the investment bank that has best weathered this storm.  FSLR gave guidance that the profits will go down, and took ENER with it.  The metals look terrible.  Now let's look at the averages.  Pretty dismal, with the best result being EEM down only 1.35%.  I see no reason to be in this market at all.  Leave it to the contrarians.  It would not surprise me to see the Dow break well below 7,000 next week.  Note the head fake centered around the first of the year.